USDCAD daily
The Canadian dollar has climbed for four straight days, which sounds impressive at the outset but it masks that it fell even harder in the four days before that, touching the worst levels since November.
In any case, it has climbed for four days in a tough tape for risk assets and oil. That’s notable and it highlights a few things that have been driving it:
1) The Federal Budget
The government hiked capital gains taxes but there was fear about a corporate tax hike or windfall taxes. That might have weighed on the loonie previously and contributed to a stronger rebound.
2) The housing market is picking up
My #1 fear for CAD coming into the year was a bad spring housing market and some kind of disorderly breakdown in housing. Instead, it’s increasingly clear that housing is bottoming or turning up (at least temporarily). Home sales have picked up and some bidding wars have even returned in a reflection of a country with too many people and not enough houses. With that, the tail risk that the BOC would have to slash rates to counter a housing crunch has faded.
Overall, I don’t see the rebound as particularly meaningful. The BOC is still going to cut rates more than the Fed this year and terminal rates are also headed lower for a sustained period. The upshot might be an ongoing global soft landing and/or upside risks in China that could keep CAD in favor. I think it’s too early for that trade though and buying USD/CAD close to 1.36 is a better trade from here.